The crisis within the Indian economy has gained unanimous acceptance by now.
Even the latest annual report of the RBI for the Financial year 2018-19 confirmed that the Indian economy has indeed hit a rough patch. The GDP growth rate of the economy has slipped to 5 percent in the first quarter of FY20, the lowest in over six years. This is an indication of tougher times ahead. Be it the recent collapse of the automobile sector or the rising number of non-performing assets (NPAs), Decreased consumer demand or failing manufacturing sector; all have a hand in this deceleration of growth rate.
The instances of job losses from automobile manufacturers to biscuit makers has led to the general acceptance of the downturn.
This is the third instance of an economic slowdown for India in the past decade after the ones that began in June 2008 and March 2011. The technical term for the same is growth recession. A recession is defined in economics as three consecutive quarters of decline in GDP. But since India is a large developing economy, decline is rare. The last instance of negative growth for India was in 1979. A growth recession is situation where the economy continues to grow but at a slower pace than usual for a sustained period, what India has been facing now a days.
The growth of the Indian economy had been predominated by consumption which includes-
· Private Final Consumption Expenditure (PFCE)
·Government Final Consumption Expenditure (GFCE)
Over the last five years, the total consumption expenditure by Indian households had accelerated with an average growth rate of 7.8 percent compared to an average of 6.1 per cent in 2011-14. But the recent sharp fall in Private Final Consumption Expenditure in the June quarter to 3.1 percent compared to 7.2 percent in the March quarter has significantly contributed to the recent slowdown.
Any fall in consumption expenditure, would escalate the crisis even more. If consumption spending falls, then output and employment levels also fall since consumption expenditure directly impacts the other two. As a consequence, the economy would stagnate, and result in prices deflation. Lower prices, if unable to recover the costs, would stop the operations of any firm. This, in turn, reduces earnings further. Hence this cycle keeps on repeating itself until the economy slips into a deeper state of shock.
In addition, another major component of India's GDP is investment, which induces-
· Investment from private sector
· Investment from government sectors
since the liberalization of 1991, Investment has been a key driver of growth. Though gross fixed capital formation, the main constituent of investment in the economy has increased, yet its contribution to growth fell by 6.2 percent in 2014-19 than in 2011-14. The contraction of investment lowers the level of infrastructure development. That causes hesitation in creating small businesses, stop entrepreneurs from investing in research and development, and thus slower the technological development.
In addition to these factors, the Growth in the economy is also affected by the various external factors.
An important factor is the US-China trade war, which has intensified over time and has contracted world trade and, in turn, Indian exports. Also, high rates of GST, liquidity crisis in NBFCs, and shift in the behavioral pattern of the workforce due to the entry of young people has discouraged savings. When people save less in the economy, it leaves less money for investments.
Recession can be short-lived if corrective actions are taken immediately, failure of which can have a deep effect on the health of an economy. Taking action of slowdown, rise in FDI inflows from $12.7 Billion (FY19) to $16.3 Billion (Q1 FY20) brought relax for the government. For overcoming the slowdown, government revised GST for the automobile sector, opened up FDI in contract manufacturing sector, Reduction of corporate Tax and even announced the recapitalization of the banking sector.
Together with these, it should also focus on optimum utilization of funds granted by RBI and direct them to boost investment in the economy both infrastructural and research investment. Further, structural shifts over the long run can be achieved through knocking into the health and education sectors that long for quality improvements. Only such long-lasting structural changes can improve the growth potential of the Indian economy and Enhance the possibility of these slowdowns within the short span of a decade
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